Wednesday, July 17, 2013

Fed Chairman Bernanke's report to Congress

Ben Bernanke

Federal Reserve Chairman Ben Bernanke met today with Congressional leaders of the Financial Services Committee to report on the Federal Reserve's take on the state of the economy and Federal Reserve actions in that regard.

In an introductory statement Mr. Bernanke made it clear that the fiscal policy that legislators have chosen to take has been a detriment to the economic recovery. In an effort to acknowledge the impact that a dysfunctional Congress has on the economy, he highlighted that tight fiscal policy will restrain economic growth. He warned that political fights over raising the debt ceiling as has happened in the past would hamper the recovery. Although a few of the Congressmen on the committee appeared to understand the importance Congress has in assisting in the recovery, it is still to be seen if Congressional Republicans take this guidance into consideration as they enter discussions about raising the debt ceiling, ending sequester or resurrecting the American Jobs Act.

Bernanke believes the economy is recovering at a moderate pace. He cited the improvements in the housing market as contributing to economic gains and predicted this would continue to improve notwithstanding recent mortgage interest gains.

He believes the labor market is improving gradually and contributed a 0.1% drop in the unemployment rate to the Fed's policies of buying assets. He admits that job growth has a long way to go to be considered satisfactory. As I have stated in previous blogs, I question the impact that buying assets really has on the job market especially because it does nothing to increase demand for products and services. It does have an important impact on the stock market as we have seen investors sell off stocks and bonds when Bernanke hinted that the asset purchase program was going to be discontinued.

Understanding the emotional nature of the stock market, Bernanke was careful not to repeat the mistake of hinting at a change in the asset program at the committee meeting. He emphatically stated that the current asset purchase program will continue and monetary policy will be "accommodative" for the foreseeable future. As of noon today the US markets appeared to be unaffected by Bernanke's comments.

In order to help prevent another Bush era financial collapse of the big banks, Fed policy is to prevent collapse by increasing the requirement for cash reserves under what is called Basel III capital reforms.

In summary, Bernanke explained three mechanisms that the Fed is using to support economic growth. These are mortgage asset purchases, forward guidance on Fed plans for the federal fund rate target and Basel III capital reforms.

Based on the comments at the committee meeting, it appears obvious that the Fed needs a lot of help from Congress to revitalize the economy. Bernanke's warning about Congressional actions around fiscal policy may have been his cry for help.